United States: From The Wild West To Westworld And (Maybe) Back To Normal – The Ongoing Saga Of LabMD (Part 1 Of 2)

It was nearly three years ago that I first blogged about the Federal Trade
Commission's "Wild West" data breach enforcement
action brought against now-defunct medical testing company LabMD.
Back then, I was simply astounded that a federal agency (the FTC)
with seemingly broad and vague standards pertaining generally to
"unfair" practices of a business entity would
belligerently gallop onto the scene and allege non-compliance by a
company specifically subject by statute to regulation by another
federal agency. The other agency, the U.S. Department of Health and
Human Services (HHS), has adopted comprehensive regulations
containing extremely detailed standards pertaining to data security
practices of certain persons and entities holding certain types of
data.

The FTC Act governs business practices, in general, and has no
implementing regulations, whereas HIPAA specifically governs
Covered Entities and Business Associates and their Uses and
Disclosures of Protected Health Information (or "PHI")
(capitalized terms that are all specifically defined by
regulation). The HIPAA rulemaking process has resulted in hundreds
of pages of agency interpretation published within the last 10-15
years, and HHS continuously posts guidance documents and compliance
tools on its website. Perhaps I was naively submerged in my
health care world, but I had no idea back then that a Covered
Entity or Business Associate could have HIPAA-compliant data
security practices that could be found to violate the FTC Act and
result in a legal battle that would last the better part of a
decade.

I've spent decades analyzing regulations that specifically
pertain to the health care industry, so the realization that the
FTC was throwing its regulation-less lasso around the necks of
unsuspecting health care companies was both unsettling and
disorienting. As I followed the developments in the FTC's case
against LabMD over the past few years (see additional blogs here, here, here and here), I felt like I was moving from the Wild
West into Westworld, as the FTC's arguments (and facts
coming to light during the administrative hearings) became more and
more surreal.

Finally, though, reality and reason have arrived on the scene as
the LabMD saga plays out in the U.S. Court of Appeals for the
11th Circuit. The 11th Circuit issued a temporary stay of the FTC's Final Order
(which reversed the highly-unusual decision against the FTC by the
Administrative Law Judge presiding over the administrative action)
against LabMD.

The Court summarized the facts as developed in the voluminous
record, portraying LabMD as having simply held its ground against
the appalling, extortion-like tactics of the company that
infiltrated LabMD's data system. It was that company, Tiversa,
that convinced the FTC to pursue LabMD in the first place.
According to the Court, Tiversa's CEO told one of its employees
to make sure LabMD was "at the top of the list" of
company names turned over to the FTC in the hopes that FTC
investigations would pressure the companies into buying
Tiversa's services. As explained by the Court :

In 2008, Tiversa ... a data security company, notified LabMD
that it had a copy of the [allegedly breached data] file. Tiversa
employed forensic analysts to search peer-to-peer networks
specifically for files that were likely to contain sensitive
personal information in an effort to "monetize" those
files through targeted sales of Tiversa's data security
services to companies it was able to infiltrate. Tiversa tried to
get LabMD's business this way. Tiversa repeatedly asked LabMD
to buy its breach detection services, and falsely claimed that
copies of the 1718 file were being searched for and downloaded on
peer-to-peer networks."

As if the facts behind the FTC's action weren't shocking
enough, the FTC's Final Order imposed bizarrely stringent and
comprehensive data security measures against LabMD, a now-defunct
company, even though its only remaining data resides on an
unplugged, disconnected computer stored in a locked room.

The Court, though, stayed the Final Order, finding even though
the FTC's interpretation of the FTC Act is entitled to
deference,

LabMD ... made a strong showing that the FTC's factual
findings and legal interpretations may not be reasonable... [unlike
the FTC,] we do not read the word "likely" to include
something that has a low likelihood. We do not believe an
interpretation [like the FTC's] that does this is
reasonable."

I was still happily reveling in the refreshingly simple logic of
the Court's words when I read the brief filed in the 11th Circuit by
LabMD counsel Douglas Meal and Michelle Visser of Ropes & Gray
LLP. Finally, the legal rationale for and clear articulation of the
unease I felt nearly three years ago: Congress (through HIPAA)
granted HHS the authority to regulate the data security practices
of medical companies like LabMD using and disclosing PHI, and the
FTC's assertion of authority over such companies is
"repugnant" to Congress's grant to HHS.

Continuation of discussion of 11th Circuit case
and filings by amicus curiae in support of LabMD to be posted as
Part 2.

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